When a credit assessor picks up your client’s application, they’ll usually run it through the 5 C’s model—a framework that helps them cover all the bases before making a call on whether a borrower’s creditworthy.
Those 5 C’s? Character, Collateral, Capital, Capacity, and Conditions. Let’s break them down and go through what they mean for asset finance and working capital loans.
1. Character
Lenders want to know if your client’s got a solid track record of repaying debt, so they'll dig into their credit file to check their previous and current lending history, as well as repayment patterns.
Asset finance
As the loan is secured against the asset, 'character' is less critical than for working capital—but it still matters and clients need to show that they have a robust credit history.
What do asset finance lenders look for in the clients credit file?
- Healthy credit score (minimum scores vary by lender)
- Decent length of credit history
- No (or few) recent applications for similar loans
- No payday loans or high-risk lending activity
- No defaults, court judgements, or poor repayment history
- Number of previous borrowings—and if they were paid on time or was there a history of missed payments?
- Loan amounts in line with previous borrowings (if the proposed loan is similar or less, that's a green flag)
- Active loans running for over 12 months or loans finished within the last 3-6 months (both green flags)
Working capital
Here, 'character' carries more weight. This is because the lender doesn't have a tangible asset to repossess and sell if the loan defaults, or control over how the borrower uses the funds. Lenders put heavy emphasis on credit file health, looking for evidence of their repayment history, as well as any adverse findings or low credit scores.
What do working capital lenders look for in the clients credit file?
- Minimum credit score: 300*
- Preferred credit score: 600+*
- Age of credit file (the older, the better)
- Recent working capital enquiries made through other lenders
- Any adverse events or defaults (paid or unpaid)
*As of April 2023
2. Collateral
When a borrower takes out a loan, they may pledge an owned asset—such as a vehicle or property—to be used as collateral in case the borrower can't repay the loan or disappears.
Asset finance
Asset finance loans are usually secured to the asset being purchased, not against the client’s property. Lenders use the loan-to-value ratio (LVR) to assess the risk associated with a loan. LVR differs per lender, but as a guide the maximum is 130%.
To calculate it, divide the amount of the loan by the value of the asset. For example:
- $80k loan on a $100k vehicle = 80% LVR (low risk)
- $120k loan on a $120k ute + fit-out = 120% LVR (higher risk)
The asset value is usually determined through an independent appraisal, valuation guides, or the purchase price.
The higher the LVR, the higher the risk for the lender, so they may charge higher interest rates to offset it. The lower the LVR, the more positive a lender will look at the application. LVRs can be lowered by offering a deposit or a trade-in.
Working capital
While assets aren't always required, for higher-value transactions (over $150k), property security is almost always expected.
It's important to discuss the security requirement with the client and ensure they understand why it's needed.
What do working capital lenders look for?
- Properties or assets they own, mortgage amount, and market value
- Mortgage information on their credit file, including repayment history
- PPSR registrations (e.g. ALLPAP)
3. Capital
Capital is the client’s access to cash and other resources, and it is an indicator of their ability to meet future loan repayments.
What do lenders look for?
- Property equity position
- Cash in the bank
- Level of existing debt or other credit facilities
If bank statements show consistent liquid funds, that’s a strong positive.
Property-backed clients with decent equity, healthy cash reserves, and low liabilities will be viewed more favourably than those with no property, limited cash reserve, and active debts.
Extra edge: Making a down payment towards the intended use can demonstrate your client's commitment and make lenders more comfortable with extending credit—even if it isn't a formal loan condition.
4. Capacity
Capacity is the client's ability to repay a loan—measured by comparing their income against recurring debts, and calculating their available funds and debt-to-income ratio.
When calculating a client's upper borrowing limit, a rule of thumb is to double their average verifiable monthly revenue (from their bank statements), excluding liabilities. Note that this method doesn’t factor recurring business expenses, and that revenue isn’t the same as profit.
To avoid uncertainties, be clear with your client on how capacity is calculated, and how their other liabilities like cards, loans, or debt can reduce it. Remember, it’s the card’s limit that’s often a deciding factor, not the actual card debt they carry.
Asset finance and low-doc options
Most lenders offer low-doc facilities (no bank statements or income proof), if the client meets certain conditions—e.g. property backing or deposit provided.
If they aren't eligible for low-doc, mid-doc or full-doc will be needed, with bank statements or financials to prove capacity.
What do lenders look for?
At a general level, lenders will confirm that the client's income is greater than their debits, and they have a healthy cash flow balance.
- Credit card limits and balances
- Existing business and asset loans
- ATO debt (amount and payment plan information)
- Turnover—6-month average from bank statements
- Upcoming payments or invoices
- Monthly rent cost of premises, assets, or plant
5. Conditions
The conditions of a loan cover:
- Loan terms like the interest rate, term, and amount
- How a borrower intends to use the loan—how the funds or asset will boost revenue and how the lender is positioned in the wider economy, including the outlook within their industry
It's important to carefully consider these factors in order to provide your referrer with the most straightforward experience and clear expectations when working with their client.
Business purpose is key. Asset finance lenders will seek clarity on how the asset will be used for business purposes—for example, a car used 50% for transport between job sites, or an excavator 100% tasked to fulfill a new work contract. Working capital lenders will stipulate that their funding is to be used exclusively for business purposes—for example, $50k for an office refurbishment.
What do lenders look for?
Loan terms
- Document requests
- Security requirements
- Debt/defaults to be cleared before settlement
- Credit score requirements
- Business purpose
External factors
These are not necessarily current, just examples of factors that influence lenders risk appetite.
- Economy - e.g. an increase in RBA rates
- Environment - e.g. bushfire-affected rural businesses
- Health - e.g. COVID-19 closures for gyms
- Legislative changes - e.g. lockout laws impacting the hospitality industry
- Industry trends - e.g. commodity price drops impacting primary producers